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Remedying the Misuse of TDFs

Defined contribution plan sponsors should provide education in appropriate ways and at appropriate times to help participants understand not only how target-date funds work, but how to select the one that’s right for them.

Target-date funds (TDFs) are designed to take a holistic
approach to retirement investing by utilizing all of a participant’s assets within
a unified, evolving portfolio, but many investors are still not using these vehicles as they are intended to be used.

According to the latest “Participant Preferences in Target
Date Funds” study by Voya Investment Management, only 10% of participants
surveyed allocate all their recurring contributions into a single TDF. More
participants (11%) are actually only investing 1% to 10% of their contributions
into one or more TDFs, while another 10% invest 41% to 50% of their recurring
contributions into TDFs.

When asked why they use TDFs in this (suboptimal) way, the
top reason was to add to diversification (45%), suggesting that plan sponsors
may need to re-evaluate how they educate participants about the benefits and
features of TDFs.

Susan Viston, client portfolio manager with Voya’s multi-asset
strategies and solutions team, spoke with PLANSPONSOR to offer some tips.
First, she suggests identifying investors in the plan who are deviating from
investing all or most of their assets into a single TDFs, before meeting them
with targeted communication and educational materials.

She says plan sponsors should provide “clear and engaging
participant education and communication around the TDF to help participants
understand not only how they work, but how to select the one that’s right for
them.” She adds, “We’ve seen a lot of participants not using TDFs the way they
were intended, which we believe can lead to sub-optimal risk profiles and
sub-optimal retirement outcomes.”

Sponsors need to clearly explain
the benefits of having professionally-managed and diversified portfolios
that change asset allocation according to a participant’s age as they near
retirement. Viston suggests taking a multimedia approach. “You can’t just have
one campaign. Use different forums like videos in addition to brochures and
letters,” Viston says.